There have been an awful lot of good men and women, most in Congress but others, Jimmy Carter, Ronald Reagan, G. H. W. Bush, Bill Clinton and President Obama among them, who have been used (in fact, absolutely horn swaggled) by the international and domestic financial industry into letting a belief in “free trade” create a gatekeeper system for capital funding.
In the name of the long standing export replacement policies (some call these policies free trade) followed by the federal government, the private and public institutions and companies working in finance in the big money center cities have routinely tweaked the state and federal laws regulating their business and taxing the profits thereon. Fifty years ago if someone needed credit that exceeded the lending limits of an individual bank, that bank would tap into its “corresponding banks,” other banks with which the first bank maintained agreements to join with it in funding loans too large to manage alone. These arrangements required all the participants to share the risk of the loan equally and in proportion to the percentage of the debt a bank took on. In other words, each bank received the same pro rata income revenue from the schedule of payments, once any administrative fee was deducted. Also, each participating bank carry the same risk burden as every other participant.
Now days, if a loan is considered too big for the originating institution, for whatever reason, the credit is divided into traunces and parceled out among various lenders. The various traunces may carry similar interest rates and similar dispersal schedules but frequently do not. The various traunces are divided according to differing levels of risk with some traunces having priority for repayment over others and, therefore, those with greater risk receive a greater return in the form of interest. There is always some entity in charge of servicing the debt on behalf of the creditors. This entity bills for payments, receives money and disburses funds to the various creditors in accordance with the contract between them. All very tidy, when it works.
Unfortunately, as we have seen all too clearly, it frequently doesn’t work. The system does more than disburse revenue, it defuses risk and makes foolish underwriting decisions much more likely, some might say inevitable. Since there has been no real, meaningful reform of the banking system since the recent meltdown, either in terms of how the system is regulated or in how the financial incentives are managed for individual “dealmakers,” it should surprise no one when a new crisis erupts in the not too distant future. By doing nothing to curb the uneven distribution of risk, no new or increased burden of responsibility has been placed on dealmakers. If you continue to tell financial dealmakers they can get rich by shouldering ever greater levels of risk and do nothing to place ever greater burdens of responsibility on those deal makers, what happen last time will happen again, and soon.
This is a problem but it is only symptomatic of the real, much greater problem. The real problem is the government’s inability to act intelligently in the face of crisis. This is not another essay on how the Congress and our President are wholly owned subsidiaries of the financial industry, though that is, basically, true. The real problem is the dogmatic belief, in the face of all evidence to the contrary, that the ongoing export replacement policy is the only true religion. Any belief that the facts of modern life more or less conclusively demonstrate that “free trade” isn’t really very good for anybody other than financiers. Indeed, it is no good for the poor third world nations suffering through it. The only developing nations that have benefited from free trade policies are those, like China, Japan and Brazil, who have totally ignored it or worked in direct opposition to it. Smaller countries, like most Islamic nations, most African nations and many Latin American nations, including, until it recently ditched the entire concept, India, have suffered horribly from exploitive wage rates, environmental degradation, human rights abuses and God knows what else in the way of evil. In the developed west, that is the United States, Canada and the European Union, mostly free trade states, there has been a slow, consistent loss of production jobs. Interestingly, most of these jobs have not been lost to poorer, free trade states but to nations like China which do not adhere to free trade policies.
You might ask yourself, why, since the religious dogma that is free trade thinking insists that in an open system comprised of many nations and cultures, production will migrate to the locales best suited for efficient production of whatever specific thing is being produced. That this dogma, like all other dogma before it, has proved to be crap should not come as a surprise to anyone.
The nations that have benefited out of all proportion during the grand export replacement drive by the west are those countries that slapped tariffs and special taxes and whatever it took to protect their domestic industry. Damn, what a surprise. For all our bitching about losing textile jobs to Mexico and Bangladesh and other free trade countries, that isn’t really what happened. We lost most of those jobs to China, Korea, India, Indonesia and other non-free trade countries.
Well, you might say, if China and the others will just play fair then the theory will prove to be correct. There are two things wrong with that response. First, by the time that proved to be true the west will have lost its lead, and maybe its productive capacity entirely, in technology and production. Who’s to say the new primary economic leaders of the world, China and India, will think it is a good idea to let others compete on a level playing field and, perhaps, take from them what was hard won? They would be fools if they did. In recent decades there is nothing to make one believe Chinese and Indian leaders are fools.
The second reason the “we’ll wait for Chinese enlightenment” theory will not work is because the entire notion of free trade being beneficial to anybody is false. The world and economics simply does not work the way the true believers say it does. Free trade doesn’t work for anybody, period.
What has happened is, in the course of making the world safe for big finance, free trade has been used to provide financiers, in this country, at least, with prohibitively beneficial tax incentives and other government provided operational advantages. These advantages and incentives have the malevolent effect of making investments in financial institutions, whether publicly traded stock companies or private investment pools, far more attractive than direct investments into production companies.
Whether it is the absolutely unfair, ridiculously low tax rate charges for profits paid investors from hedge fund and private equity companies or the effective guarantee provided by central banks that no loss will accrue to a financial institution from a bad deal with another financial institution or countless other little risk mitigation measures governments give to banks and major investment entities, the cost of doing business for financial companies is much lower than for production companies because there is less risk. There is less risk because our government, and the governments of other western nations, have decreed it be so.
Of course, even with the whole deal rigged in their favor, the financial geniuses of the world have demonstrated time and time again, they can and will screw it up. And, when they do, what happens? They run to Uncle Sugar and demand, for the benefit of all the great unwashed who need the ATM machines to work, that the government bail them out. Who knows what the last bailout cost. Some say ten trillion, others twenty-three trillion, still other upwards of forty trillion. Who can say? No one seems to know the precise figure and any comprehensive audit of the system would be “destructive” to system independence upon which everything depends or the “politicians will take over” and that would be unthinkable. (I suspect the cost of the bailout is, more or less, equal to the amount of derivative debt swap instruments out here at the time of the crash, around seventy-five trillion, give or take a trillion.)
Further, we are told that any restriction on the “free movement of capital” will crash the entire world economy. Also, taxes on financial gains must be kept low, assuming they cannot be eliminated altogether, or the big money boys will pull out of the nation and take their money with them.
So, the religion of free trade limits all our options to one; i.e., do whatever the big money center financiers tell us we have to do. If doing as we are told means the slow elimination of our productive capacity, if it means the continuing destruction of the middle class, if it means the inability of our government to provide basic social services, indeed, if it comes to mean our government will have the inability to provide even basic services and/or infrastructure of any kind, no matter. The dogma decrees that we much “stay the course.” If we fail to do so, all manner of horrible things, things like adequate social service networks, things like adequately funded public education, things like the ability of blue collar workers to have a middle class life and provide for their families, things like having safe bridges on our highways, having highways, having public transportation, having a decent life, all these horrible things (God forbid, it could even include a real program of public health care) could befall us if we violate the strict demands of our financial masters.